Social Security:Is It "A Crisis that Doesn't Exist"?

by Andrew G. Biggs

Andrew G. Biggs is a Social Security analyst at the Cato Institute.

Executive Summary

A consensus has developed across the political spectrum that the Social Security program faces significant problems and is in need of far-reaching modifications. Would-be reformers debate vigorously on the best changes for Social Security. Some argue for transforming the nation's pension program to a defined-contribution system of personal retirement accounts while others support retaining the current defined-benefit structure through a series of tax increases and benefits cuts or through investing a portion of the program's assets in equities.

But some people in politics, the press, and the policy community are questioning that consensus, calling Social Security's projected funding shortfalls merely the result of pessimistic economic and demographic projections by the program's Board of Trustees. If the economy grows faster than projected, as they believe it surely will, then wages and payroll tax revenues will rise and Social Security will become, in the words of Rep. Jerrold Nadler (D-N.Y.), "a crisis that doesn't exist."

However, independent assessments of the Trustees' projections for productivity, labor force growth, and longevity show the projections to be reasonable and perhaps even optimistic. For Social Security to remain solvent, even in a bookkeeping sense, would demand unprecedented levels of economic growth. More important, even if the economy does grow more quickly, Social Security's benefit liabilities and its funding shortfalls will eventually rise along with the economy. Even under assumptions vastly more optimistic than those the crisis deniers put forward, Social Security still faces trillions of dollars in tax increases or benefit cuts if the system is to stay in balance.

A possible corollary exists to the argument made by skeptics of the Social Security crisis. If the economy grows as slowly as the trustees project, can market investments like stocks and bonds continue to produce returns superior to those from Social Security? Although future returns from market investments cannot be guaranteed, the differences in returns between Social Security and market investments are so great that even under a worst-case scenario personal retirement accounts invested in stocks and bonds would produce far higher returns than Social Security.

In short, Social Security's crisis is real and may be even larger than commonly thought. While debate may continue over the proper course of action, doing nothing in hopes that the economy will come to the rescue is wishful thinking, at best.